French Skeptic a Hurdle for Basel II Replacement

The U.S. and French governments are divided over the need for a new set of capital adequacy rules to replace the Basel II standards that took more than a decade to negotiate, according to a source in a delegation attending a meeting of finance ministers and central bankers from the Group of 20 nations.

The United States, backed by Britain and others, is advancing a proposal calling for tough new capital rules for the world's largest banks.

Treasury Secretary Timothy Geithner sent a detailed letter to his G-20 counterparts, saying the standards should be agreed to by the end of 2010 and in force by 2012.

The United States wants higher capital mandates for banks and a requirement that banks hold much higher quality capital.

However, in advance of the G-20 finance ministers' summit, France appears unwilling to sign on to that proposal. Finance Minister Christine Lagarde has argued that the Basel II capital rules are appropriate.

In particular, the French government appears unhappy about limiting the amount of leverage banks can take on.

Speaking to reporters Friday, Lagarde said the Basel II rules have been "significantly improved and amended over time." "As revised, I would have thought that we addressed the issue … of securing, protecting the activities of banks with sufficient capital levels," she said.

By contrast, France continues to take an aggressive approach against bonuses including caps on them, which U.K. Finance Minister Alistair Darling has called "unenforceable."

The French position has frustrated some others; one G-20 official said excessive bonuses, though an important issue, were a far smaller cause of the financial crisis than banks with inadequate capital coverage.

"The basic issue is that banks didn't have enough capital before the crisis," the source said.

At the moment, it is unclear whether the gap between the French and U.S. government positions on capital can be closed.

Senior G-20 officials have said they are aiming for an agreement on financial reforms by the time of the G-20 leaders' summit in Pittsburgh on Sept. 24-25. However, the differences made it very unlikely agreement could be reached over the weekend.

Geithner seeks an increase capital for all banks. He said even higher standards are necessary for systemically important companies.